Fed Says Baby Boomers Will Drag Down Stock Prices

Baby boomers are starting to do what they’ve been threatening for the past 65 years: Retire.

ageing Baby boomers have been the subject of much controversy in regards to their impact on the U.S. economy, and now evidence exists that retiring baby boomers may be responsible for halting progressive growth in the stock market.

The Federal Reserve Bank of San Francisco is behind the recent studythat identifies baby boomer’s tendency to do what most retirees do – sell their risky assets and investments and live out the remainder of their years in nest egg glory.

“The report by the Federal Reserve Bank of San Francisco predicts that stock prices could fall 13% over the next decade solely because of baby boomers dumping stocks to branch into more conservative investments as they retire.” (via LA times)

The problem stems purely from the number of boomers expected to pull investments out of the market. After all, 17.6 million individuals born between 1946 and 1964 make up Generation X, and massive withdrawals on that scale in a short time span could send the stock market into a tizzy.

In a way, the stock market has been largely tied to baby boomer’s maturity. Vivien Chen of Bloomberg explains: The equity-price-to-earnings ratio of U.S. stocks tripled from 1981 to 2000 as baby boomers reached their peak working ages, and has declined since then, according to Spiegel and Liu [writers of the FED’s report].”

The FED report reads: “It is disconcerting that the retirement of the baby boom generation, which has long been expected to place downward pressure on U.S. equity values, is beginning in earnest just as the stock market is recovering from the recent financial crisis, potentially slowing down the pace of that recovery.”

As the early boomers hit 65-years-young this year, the first wave of retirement withdrawals begin. The report by the Federal Reserve Bank of San Francisco says foreign investors may step in to mitigate the effects, but the effects would be limited.

There’s also the possibility that the sell-off of assets will not be so disproportionate. After all, some will be passed down to younger generations without ever leaving the market. Then there’s Generation Y (the Echo Boomers, or successors of Generation X born between mid 1970’s to the mid 1990’s) who have by now largely entered the work force, contributed taxes, and are on the verge of making large investment of their own.

When it comes down to it, baby boomers will retire. It simply can’t be helped, and the largest generation in American history must be financed somehow, so where better to start than with their own assets?

So, which stocks have an exposure to baby boomers? J.P. Morgan has compiled an ageing Population Index that tracks a selection of stocks with exposure to this group.

1. Celgene Corporation (CELG): Biotechnology Industry. Market cap of $25.38B. Current price at $57.17. Relatively low correlation to the market (beta = 0.63), which may be appealing to risk averse investors. The stock has gained 3.4% over the last year.

2. Carnival Corporation (CCL): General Entertainment Industry. Market cap of $23.62B. Current price at $30.88. It’s been a rough couple of days for the stock, losing 5.36% over the last week.

3. Humana Inc. (HUM): Health Care Plans Industry. Market cap of $11.62B. Current price at $71.87. It’s been a rough couple of days for the stock, losing 5.92% over the last week.

4. Varian Medical Systems Inc. (VAR): Medical Appliances & Equipment Industry. Market cap of $6.15B. Current price at $54.62. Relatively low correlation to the market (beta = 0.79), which may be appealing to risk averse investors. The stock is currently stuck in a downtrend, trading -5.31% below its SMA20, -15.5% below its SMA50, and -18.94% below its SMA200. It’s been a rough couple of days for the stock, losing 7.38% over the last week.

5. Royal Caribbean Cruises Ltd. (RCL): General Entertainment Industry. Market cap of $4.84B. Current price at $23.26. This is a risky stock that is significantly more volatile than the overall market (beta = 2.88). The stock is currently stuck in a downtrend, trading -14.58% below its SMA20, -28.46% below its SMA50, and -41.71% below its SMA200. It’s been a rough couple of days for the stock, losing 15.42% over the last week.

6. Wyndham Worldwide Corporation (WYN): Lodging Industry. Market cap of $4.51B. Current price at $28.94. This is a risky stock that is significantly more volatile than the overall market (beta = 3). The stock is currently stuck in a downtrend, trading -5.26% below its SMA20, -10.04% below its SMA50, and -7.27% below its SMA200. It’s been a rough couple of days for the stock, losing 11.03% over the last week.

7. Coventry Health Care Inc. (CVH): Health Care Plans Industry. Market cap of $4.38B. Current price at $31.04. Might be undervalued at current levels, with a PEG ratio at 0.93, and P/FCF ratio at 9.74. It’s been a rough couple of days for the stock, losing 5.94% over the last week.

8. Omnicare Inc. (OCR): Drugs Wholesale Industry. Market cap of $3.12B. Current price at $29.85. Relatively low correlation to the market (beta = 0.69), which may be appealing to risk averse investors. The stock is a short squeeze candidate, with a short float at 9.26% (equivalent to 7.46 days of average volume). The stock has performed poorly over the last month, losing 14.36%.

9. The Scotts Miracle-Gro Co. (SMG): Agricultural Chemicals Industry. Market cap of $2.89B. Current price at $46.4. Relatively low correlation to the market (beta = 0.73), which may be appealing to risk averse investors. The stock has performed poorly over the last month, losing 11.16%.

10. HealthSpring Inc. (HS): Health Care Plans Industry. Market cap of $2.31B. Current price at $35.83. Might be undervalued at current levels, with a PEG ratio at 0.7, and P/FCF ratio at 11.4. It’s been a rough couple of days for the stock, losing 6.27% over the last week.

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

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